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Reserve ramps up warning on bank lending practices

PETER LLOYD: First today, a snapshot of the health of the nation's finances.

The Reserve Bank has been warning the retail banks to keep a close eye on their lending practices.

In its half yearly report on the financial system, the RBA has also issued a warning to people who are investing their super in property.

The World Today's Simon Lauder was at the Bank's Sydney headquarters this morning for a media briefing.

Simon, why is the RBA concerned about bank lending standards?

SIMON LAUDER: Well, you can't fail to notice that the real estate market is heating up significantly for the first time in a long time. So the basic concern is that the temptation to loosen standards may be too high for the banks.

In recent years they haven't made as much money from taking on loans and have had to cut their own costs to bolster those profits.

And now non-bank lenders, potentially with lower standards for issuing loans are re-entering the market. And the RBA says the value of non-conforming housing loans has roughly doubled since 2012.

In its financial stability review released this morning, the Reserve says the banks have been behaving themselves pretty well since late 2011 with good lending standards. But it's issued this warning:

PETER LLOYD: Right, good to know banks can behave themselves. Why are self managed super funds being singled out by the banks?

SIMON LAUDER: Well the global financial crisis prompted many people to question the wisdom of investing their retirement savings in the stock market. Fair enough, perhaps. But now the RBA is warning that putting your super into real estate may also be more risky than it seems. Especially if you're borrowing more money so you can do that.

In New South Wales, 40 per cent of housing loan approvals are now for property investors. And the Reserve is warning that speculation could be driving up property prices to unrealistic levels.

On property prices and the risk to people who've tied their retirement funds to them, the RBA's financial stability review says this - it's important that those purchasing property maintain realistic expectations of future dwelling price growth. Dwelling prices might be expected to be more in line with income growth. So, lower those expectations.

The self managed super funds have been targeted heavily by property spruikers lately and this is the central bank sounding the alarm that some people may be getting in over their heads.

PETER LLOYD: Alright. Now, the board of the RBA is due to meet next week, what could that mean for interest rates?

SIMON LAUDER: Could be a long meeting. It increases any dilemma the RBA may have had about whether to cut or increase rates, anyway. Business confidence has been flagging and although there are signs of recovery, many retailers would like interest rates to drop, so people have some more money in their pockets to spend in those shops.

But today's report shows the Reserve is clearly concerned about the impact of those low rates already.

On the other hand, increasing rates would make life tougher for exporters if the dollar goes up as well.

And the immediate impact of this morning's report is that the dollar went up slightly on speculation that the RBA may leave rates on hold.